India Budget 2014: Is it a 'Goal'?

Did the Government score a Goal?

As the Government  rolled out the Budget, mixed reactions are seen within the VC and PE community. While those who focus more on the capital market side of the business are relishing, the folks who do more activity on the private side (including PE houses) do not have much to cheer. The Real Estate and Infrastructure funds have joined the party.

One should give due credit to the Finance Minister for making a few bold announcements with the underlying theme of providing clarity and removing uncertainty with regard to the tax laws. However, there are a few pockets where the expectations have not been met.

There has been a flurry of announcements from a policy perspective. The Finance Ministry is in the process of ongoing  consultations with all the stakeholders on the enactment of the Indian Financial Code and reports of the Financial Sector Legislative Reforms Commission (FSLRC) which will now be completed.

A time bound programme called Financial Inclusion Mission will be launched on 15 August this year with focus on the weaker sections of the society.

With specific focus on the MSME sector, a INR 10,000 crore fund will be set up to act as a catalyst to attract private Capital by way of providing equity , quasi equity, soft loans and other risk capital for start-up companies with suitable tax incentives to participating private funds.

Some of the major asks from the tax payers and investors have not  been met. These mainly include the deferment of GAAR (General Anti Avoidance Rules) and clarity on taxation of indirect transfer of shares, though, there has been a mention about a Committee being formed to look at the later issue.

There was a clear expectation that GAAR would be deferred if not diluted. However, the provisions have not been touched with the result that as per the law as it stands today, these provisions will trigger from 1 April 2015.

In the case of FIIs it has been clarified that any income earned by them from transfer of security will be characterized as capital gains for tax purposes. This shuts the window of such income being regarded as 'business income' as there was a view prevailing that such income should not be taxed in the absence of a Permanent Establishment in India.

From an investment perspective, a significant change which has been proposed is the recast of the holding period for the purpose of determining long term capital gains. Thus, sale of shares of an unlisted company will be considered as long term only if the period of holding exceeds 36 months as against 12 months as applicable currently. Thus, sale of shares of portfolio companies will trigger a higher tax rate if these are sold within 36 months assuming that the treaty benefit is not available in such cases. Similarly, in the case of debt oriented mutual fund, the period also stands extended to 36 months.

By rejigging the method of computing the dividend distribution tax, it has caused an increase in the effective tax rates when one looks at distribution of profits to the shareholders.

As part of the overall prioritization towards the Infrastructure sector, the Government has made handsome announcements with regard to Invit (Infrastructure Investment Trusts) and Reits (Real Estate Investment Trust). It is expected that the draft regulations will be notified by SEBI soon. While these vehicles have been granted pass through status they does not appear to be a 'full pass through'. These trusts will be liable to pay capital gains tax at the applicable rates.

One of the significant proposals from a compliance perspective is that Venture Capital Funds, Venture Capital Companies, Mutual Funds, Securitisation Trusts, Business Trusts will not be mandatorily required to file their tax returns.

While all expectations of the VC/PE community do not  seem to be met, some of the announcements do sound extremely promising for the future. It is also amply clear that the Government has set the stage for an overall development of the country with growth galloping towards winning the World Cup - making of India as one of the matured economies of the world.

(Anil Talreja is a Partner with Deloitte Haskins & Sells.)

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